Tax Cut and Jobs Act of 2018
The Tax Cuts and Job Acts recently passed will bring MAJOR changes. We are still trying to digest them all and will continue throughout the year. We hope to have some highlights summarized for you shortly. Mass quantities of information continue to come in daily as the experts try to figure this all out and what it will mean for all of us. I can tell you that MOST will see a decrease in their 2018 taxes, but not all.
The bad news is that contrary to common belief there is still a penalty for not having health insurance for 2018. One of the biggest changes is the schedule A itemized deduction for unreimbursed employee work expenses is gone. Those of you who have deducted work expenses like work miles on your personal vehicle, in-home office expenses, overnight per diem, union dues, uniforms, and tools etc. will no longer have that deduction, however the standard deduction nearly doubles to $12,000 for single, $18,000 for HOH, and $24,000 for MFJ. The elimination of this deduction will be a HUGE hit for hired OTR drivers, road crews who are constantly working out of town, and sales professionals who use their own vehicle. Hopefully your employer will be working on a new system to help reimburse you for your out of pocket expenses. You would both benefit from a reimbursement plan vs. increased wages. It would result in less taxes for both of you compared to a wage increase.
Note: This elimination does not apply to the SELF-EMPLOYED. Only to those earning W-2 wages, but deducting unreimbursed work expenses not reimbursed by your employer. If you are filing a schedule C or a business tax return you will still be able to deduct all your business-related expenses as usual.
The good news… The child tax credit increased to $2000 per child with no phaseouts until over $415K joint income, the tax tables are better and there is now a deduction for those with any sort of self-employment or business INCOME, based on profit. It’s a very complicated formula and hard to explain in full. I will cover more about the new business-related changes toward the end of this summary.
They are also capping the state and local tax deduction to $10K and eliminating the exemption deduction you get for everyone in your family. What you may see is that your taxable income may increase, but with the better tax tables and the increased child tax credit, the end-result for most will be lower taxes.
Two things to keep in mind… This is not retroactive! These changes are for 2018!! They are starting to affect you now, but do not affect the tax return we will be doing this season. Again, they will not affect your tax return until NEXT year. Additionally, Iowa does not follow or couple with federal tax code so depending on what happens in Des Moines this legislative session, none of this applies to the Iowa tax return yet.
Unless you are one of the people greatly affected by the elimination of the employee work expense deduction, please try to hold your questions for us until your tax appointment or keep them brief. Our priority for the next couple months in providing the best service we can to you for filing your 2017 taxes. There is very little that most can do to prepare for the 2018 changes, so please wait to ask your questions during your appointment. We should have the ability to give you a “forecast” of how the changes will affect you on next year’s tax return and we will have a more comprehensive “hand-out” of the changes if you are interested.
If you are one of those greatly affected, the best thing you can do is have a conversation with your employer, but we are also here to help you understand the changes. If you are concerned about how this will specifically affect you look at your 2016 Schedule A. Please go find it and do not call and ask us to send you a copy unless necessary. (We charge $15 for additional copies of your return). Take your total itemized deductions from line 29 and subtract line 27, your total miscellaneous deductions. That number would be your new itemized deduction (for this purpose only – we are not considering any other deduction at this point). If the result is less than $12,000 for single, $18,000 for HOH, and $24,000 for MFJ then (without taking into consideration state taxes) you will be taking the new standard deduction. The increase in taxable income will be the difference of your 2016 total itemize deductions (line 29) and your new standard deduction. (Assuming the numbers for those years would be similar).
If the result is greater than those new standard deduction amounts then that difference would reflect your new itemized deduction (again, not considering any changes for state taxes).
Example for single filer: (2016 line 29 total) $15,000 – (line 27 work related) $8,000 = $7,000 (your new itemized deduction) Therefore you will take the new standard deduction of $12,000 and your taxable income for 2018 will increase by $3,000 ($15K – $12K = $3K).
Example for single filer with a lower work deduction: (2016 line 29 total) $11,000 – (line 27 work related) $3000 = $8000 (your new itemized deduction) Therefore you will take the new standard deduction of $12000 and your taxable income for 2018 decreased by $1,000 ($12K – $11K = $1K).
Now… take a deep breath and look at the new tax tables below. While your taxable income may increase, the tax tables do reflect a tax savings, so it may not end up as bad as you think. And if you have children under 17 then the increase in child tax credit just might off-set your taxable income increase. If you do not have kids to offset the increase in taxable income, depending on the difference in deduction amount, you could see a substantial tax increase.
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
Now more about the business changes…. You may start to hear a lot of talk about QBI deduction, short for Qualified Business Income, and the deduction for simple purposes is 20% of business profit (give or take a few other details that will not apply to many of our clients). It applies to pass-through entities (so not C-corps) like sole proprietorships (Schedule C filers), partnerships, Sub-S corps, LLC’s, trusts and estates, REIT’s and qualified co-ops. The exception is it is only unavailable to certain service-type business like doctors, lawyers, accountants, financial and insurance professionals, etc. where the principal asset is the skill or reputation of one or more of its employees or owners if total taxable income on the individual 1040 is less than $315K for joint (157,500 for single) filers. If taxable income is over $415K (or 207,500 single) then the deduction is not available at all. If you fall in between those income-limits, then your deduction will be pro-rated or phased out. More on this to come, but bottom line, unless you are a high-income service business, there is now a business deduction for all self-employed and small businesses. Not sure yet if this will be available for rental income or self-rental.
There will also be new more favorable depreciation options, but again, more to come, but what I’ve seen so far, small business will benefit from this legislation. Also, most of these tax provisions are set to expire at the end of 2025. So… we’ll see how things go. Nothing in our tax code is forever, other than the fact you must file and pay!